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EC120 Study Guide - Midterm Guide: Substitute Good, Normal Good, Indifference Curve

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goldoyster509
4 Aug 2020
School
WLU
Department
Economics
Course
EC120
Professor
Ken Jackson

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EC120 Full Course Notes
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EC120 Full Course Notes
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Document Summary

The absolute value of the budget line equals 0. 67 cola per popcorn. The slope of budget line equals the relative price of popcorn. : suppose that an individual owed no taxes on the first ,000 she earned and 15 percent of any income she earned over ,000. Explain in words using the income and substitution effects. (answer: a lower tax rate would give rise to income and substitution effects on a person"s choice of consumption and leisure. The income effect would increase both consumption and leisure, if both are normal goods, since the reduction in the tax rate leaves more after-tax income. The lower tax rate would increase the slope of the budget constraint, so the substitution effect would increase consumption and decrease leisure. Explain in words using the income and substitution effects. (answer: an increase in the amount on which no tax is owed would be a pure income effect.

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Related Questions

30) If the price of an inferior good rises, the income effect A) will have an uncertain effect on consumption of the good, and the substitution effect will decrease consumption. B) will decrease consumption of the good, and the substitution effect will decrease consumption. C) and the substitution effect will both increase consumption of the good. D) and the substitution effect will both decrease consumption of the good. E) will increase consumption of the good and the substitution effect will decrease consumption.

29) If the price of a normal good rises, the income effect A) will increase consumption of the good and the substitution effect will decrease consumption. B) will decrease consumption of the good and the substitution effect will increase consumption. C) and the substitution effect will both increase consumption of the good. D) and the substitution effect will both decrease consumption of the good. E) is always larger than the substitution effect.

60) If X is a normal good then, after the price of X decreases to $3 per unit, we can say: A) that X consumption will increase if the substitution effect is stronger than the income effect. B) that X consumption will increase. C) that X consumption will decrease D) that X consumption will decrease if the substitution effect is stronger than the income effect. E) nothing about the new consumption point without more information.